4.1 Louisiana Trust Account Requirements
Key Takeaways
- Only a broker maintains a trust (escrow) account; salespersons may never hold client funds
- All client money - earnest money, deposits, rent - must go into the designated trust account, kept separate from broker funds
- Commingling (mixing) and conversion (using client funds) are serious violations that can lead to revocation and criminal charges
- Brokers must keep complete trust records - bank statements, client ledgers, and monthly reconciliations - for the required retention period
- LREC may audit trust accounts at any time without prior notice; shortages are among the most serious findings
Trust-account handling is a top source of discipline, so the rules are tested heavily. The core principle: money that belongs to others must be kept separate and accounted for to the penny.
Who Holds Funds, and Where
A trust account (escrow account) is a bank account where a broker holds money belonging to others. Only the broker maintains it - a salesperson who receives a deposit must promptly deliver it to the sponsoring broker and may never hold client funds in a personal or separate account.
| Fund type | Example |
|---|---|
| Earnest money | Buyer's good-faith deposit |
| Security deposits | Tenant deposits on managed rentals |
| Rent collections | Collected for owner-clients |
| Pending proceeds | Funds awaiting disbursement at closing |
The account must be designated as a trust/escrow account at a recognized financial institution and kept separate from the brokerage's operating funds.
Critical rule: Salespersons cannot hold client funds. The chain is client -> salesperson delivers promptly to broker -> broker's trust account.
Commingling and Conversion
Two cardinal sins define trust-account discipline:
| Term | Definition | Why it's serious |
|---|---|---|
| Commingling | Mixing client funds with the broker's personal/business funds | Destroys separation; even without theft it is a violation |
| Conversion | Using client funds for an unauthorized purpose | Effectively theft; can bring revocation and criminal charges |
A broker may keep only a small amount of the broker's own money in the trust account to cover bank service charges and avoid the account closing - this minimal "float" is permitted and is not commingling. Using a client's earnest money to pay the brokerage's rent, or "borrowing" from the account intending to repay, is conversion regardless of intent to return it.
Recordkeeping and Reconciliation
Brokers must maintain complete, current records and reconcile the account regularly.
| Record | Purpose |
|---|---|
| Bank statements | Monthly institution records |
| Deposit slips/receipts | Proof of each deposit |
| Disbursement records | Proof of each payment out |
| Individual client ledgers | Running balance per client/transaction |
| Monthly reconciliation | Bank balance must match the sum of client ledgers |
The defining test of a healthy trust account is that the bank balance equals the total of all individual client ledger balances at reconciliation. A shortage (bank balance below what clients are owed) is one of the gravest findings.
Disputed Deposits and Disbursement
A broker disburses trust funds only as the contract provides, on the parties' written agreement, or under a court/LREC directive. When buyer and seller dispute who gets the earnest money, the broker must not simply hand it to one side.
| Situation | Broker's action |
|---|---|
| Closing proceeds as agreed | Disburse per the contract |
| Both parties agree in writing | Disburse per the written instruction |
| Parties dispute the deposit | Hold the funds; await written agreement, interpleader, or LREC/court directive |
Trap: Releasing disputed earnest money to the seller because "the buyer defaulted" - without written agreement or a legal order - is itself a violation. The broker is a neutral custodian, not a judge.
Retention and LREC Audits
Brokers must retain trust-account and transaction records for the period set by LREC rule (commonly several years) and produce them on demand.
| Authority | Detail |
|---|---|
| No-notice audits | LREC may examine trust accounts at any time without prior notice |
| Investigation | Records may be subpoenaed during complaints |
| Discipline | Shortages, commingling, or poor records can mean fines, suspension, or revocation |
| Common audit finding | Typical consequence |
|---|---|
| Shortage of funds | Most serious - potential revocation |
| Commingling | Fine to revocation |
| Missing reconciliations | Warning to fine |
| Late deposits | Warning to fine |
Exam point: Tie the trust account to separation, accounting, no-notice audits, and broker-only control. If a fact pattern has a salesperson depositing client money anywhere but the broker's trust account, it is a violation.
Worked Reconciliation Example
A simple example shows what reconciliation means. Suppose the broker's trust account holds funds for three deals plus a small bank-fee float:
| Ledger | Balance owed |
|---|---|
| Smith purchase (earnest money) | $5,000 |
| Jones rental security deposit | $1,200 |
| Davis closing proceeds (pending) | $8,000 |
| Broker float (bank fees) | $100 |
| Total ledgers | $14,300 |
At month-end, the bank statement must show $14,300 (adjusted for outstanding items). If the bank shows $13,800, there is a $500 shortage - a red-flag finding suggesting funds were misapplied or a deposit was missed. If the bank shows $15,500 with no explanation, that surplus also signals a recordkeeping problem (possibly commingled funds).
Exam math point: A trust account is "in balance" when the reconciled bank balance equals the sum of all client ledger balances plus any permitted broker float. Any unexplained difference - shortage or surplus - is a compliance problem.
Interest on Trust Funds
If a trust account earns interest, the interest belongs to the client/beneficiary unless all parties agree otherwise in writing; a broker may not pocket interest on others' money. Some funds may be placed in interest-bearing accounts only with proper authorization. Treat any client-fund interest the way you treat the principal: it is not the broker's money absent written agreement.
Timing, the Recovery Fund, and Sole-Ownership
Louisiana ties trust handling to firm deadlines and to the consumer-protection Real Estate Recovery Fund. Earnest money and other entrusted funds must be deposited promptly into the broker's trust account — a salesperson who pockets or sits on a deposit, or routes it through a personal account, commits a violation even if no money is lost. The chain is fixed: client → salesperson delivers promptly → broker's designated trust account.
The Real Estate Recovery Fund reimburses consumers who win a judgment against a licensee for fraud, misrepresentation, or conversion that the licensee cannot pay. Two exam-critical consequences follow a payout:
| Consequence | Detail |
|---|---|
| Automatic suspension | The licensee's license is suspended until the fund is repaid in full, with interest |
| Per-claim / aggregate caps | The fund pays statutory maximums per transaction and per licensee, not unlimited amounts |
Exam point: the trust account is broker-controlled, separate, reconciled, and subject to no-notice LREC audit; the Recovery Fund is the consumer's last-resort backstop, not a substitute for the broker's own liability. A licensee triggering a Recovery-Fund payout does not simply pay a fine — they lose the license until the public money is restored.
Who may maintain a trust account for client funds in Louisiana?
Using a client's earnest money to pay the brokerage's office rent is an example of:
When buyer and seller dispute the earnest money, the broker should:
LREC's authority to examine a broker's trust account is best described as: